Empirical Pricing Kernels and Investor Preferences

Kai Detlefsen, Wolfgang Karl Härdle and Rouslan Moro

No SFB649DP2007-017, SFB 649 Discussion Papers from Humboldt University, Collaborative Research Center 649

Abstract: This paper analyzes empirical market utility functions and pricing kernels derived from the DAX and DAX option data for three market regimes. A consistent parametric framework of stochastic volatility is used. All empirical market utility functions show a region of risk proclivity that is reproduced by adopting the hypothesis of heterogeneous individual investors whose utility functions have a switching point between bullish and bearish attitudes. The inverse problem of finding the distribution of individual switching points is formulated in the space of stock returns by discretization as a quadratic optimization problem. The resulting distributions vary over time and correspond to different market regimes.

Keywords: Utility function; Pricing Kernel; Behavioral Finance; Risk Aversion; Risk Proclivity; Heston model. (search for similar items in EconPapers)
JEL-codes: G12 G13 C50 (search for similar items in EconPapers)
New Economics Papers: this item is included in nep-upt
Date: Written
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